Cig volumes surprise July 26, 2012 Gautam Duggad gautamduggad@plindia.com +91-22-66322233 Rating BUY Price Rs249 Target Price Rs275 Implied Upside 10.4% Sensex 16,640 Nifty 5,043 (Prices as on July 26, 2012) Trading data Market Cap. (Rs bn) 1,930.3 Shares o/s (m) 7,738.1 3M Avg. Daily value (Rs m) 1487 Major shareholders Promoters 0.00% Foreign 17.73% Domestic Inst. 34.14% Public & Other 48.13% Stock Performance (%) 1M 6M 12M Absolute 1.0 21.1 24.2 Relative 2.5 23.6 34.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2013 9.3 9.3 0.3 2014 11.2 10.9 2.3 Price Performance (RIC: ITC.BO, BB: ITC IN) (Rs) 270 250 230 210 190 170 150 Jul-11 Sep-11 Source: Bloomberg Nov-11 Jan-12 Mar-12 May-12 Jul-12 Cigarettes volumes up ~1%: ITC s Q1FY13 results met our expectations, with Sales, EBITDA and PAT at Rs66.5bn (16.5 % YoY), Rs23.07bn (23.2%YoY) and Rs16.02bn (20% YoY) v/s our expectations of Rs66.6bn, Rs22.1bn and Rs16.08bn, respectively. Cig volumes grew ~1% better than our expectations of ~2% decline. This is impressive, given the recent ~13% price increases taken post budget. Cig EBIT growth of 20.5% and margin expansion of 260bps once again underscores the pricing power enjoyed by ITC. Non-Cig FMCG sales grew by 23%, led by volumes and improved mix, while losses halved for the quarter. Hotels continued to post weak numbers with flat revenues and 50% EBIT decline driven by start-up costs for its Chennai property. Agri division posted revenue decline (-1%) on account of surplus leaf tobacco inventory and adverse commodity price comps. However, richer mix aided the 90bps margin expansion. FMCG losses decline 75%; Cig margins up 260bps: Cigarette posted strong 260bps improvement in EBIT margins driven by price hikes, better product mix, softer RM costs and eighth consecutive quarter of margin expansion, underscoring ITC s pricing power once again. Non-Cig FMCG growth was driven by branded packaged food, personal care and stationery unit. Packaged Foods witnessed mixed improvement across segments, in turn, aiding improvement in profitability as losses reduced 49% to Rs388m. As per management, Sunfeast Yippee noodles continued to gain share. Paper division reported a modest 9% growth, constrained by capacity (capacity addition of 1lakh tons expected in Q4FY13e) but posted a strong 180bps YoY and 550bps QoQ margin expansion. Hotels performance was impacted by weak macros and increased supply. Maintain BUY with a revised SOTP of Rs275: We maintain our estimates for now despite better-than-expected Cig volumes and margins which enhances near-term earnings visibility for the stock. We are modelling 2% volume declines for FY13e. Continued traction in non-fmcg sales and improving profitability along with consistent and higher pay-out ratio are the other positives. ITC is also relatively well insulated from potential monsoon-related headwinds for the consumer sector. Performance of <65mm Cig is a key monitorable. Key financials (Y/e March) 2011 2012 2013E 2014E Revenues (Rs m) 222,737 261,837 301,614 350,084 Growth (%) 16.4 17.6 15.2 16.1 EBITDA (Rs m) 74,077 88,415 101,816 121,237 PAT (Rs m) 50,083 62,584 72,891 87,182 EPS (Rs) 6.5 8.0 9.3 11.2 Growth (%) 20.3 23.7 16.5 19.6 Net DPS (Rs) 4.5 4.8 5.6 6.7 Profitability & Valuation 2011 2012 2013E 2014E EBITDA margin (%) 33.3 33.8 33.8 34.6 RoE (%) 32.4 35.8 37.2 39.6 RoCE (%) 32.5 36.0 37.2 39.6 EV / sales (x) 8.4 7.2 6.2 5.3 EV / EBITDA (x) 25.2 21.2 18.3 15.3 PE (x) 38.5 31.2 26.8 22.4 P / BV (x) 11.7 10.6 9.4 8.4 Net dividend yield (%) 1.8 1.9 2.2 2.7 Source: Company Data; PL Research Q1FY13 Result Update PrabhudasLilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q1FY13 Result Overview (Rs m) Y/e March Q1FY13 Q1FY12 YoY gr. (%) Q4FY12 FY13E FY12 YoY gr. (%) Net sales 66,522 57,675 15.3 68,614 301,614 261,795 15.2 (Increase) / decrease in stock-in-trade & WIP (2,496) (4,090) 3,124 (864) Consumption of raw materials 20,683 19,582 18,942 78,105 Purchase of traded goods 7,579 7,609 5,975 19,212 RM cost 25,766 23,101 11.5 28,041 109,615 96,453 Gross profit 40,756 34,574 17.9 40,573 191,999 165,342 16.1 Employees cost 4,125 3,885 6.2 3,323 22,923 19,443 17.9 Other expenditure 13,557 11,960 13.3 15,549 67,260 57,525 16.9 EBITDA 23,075 18,729 23.2 21,701 101,816 88,375 15.2 Depreciation (1,948) (1,665) 17.0 (1,880) (8,110) (7,455) Other income 2,376 2,506 (5.2) 3,012 13,286 11,566 14.9 EBIT 23,503 19,571 22,832 106,992 92,487 15.7 Interest (138) (200) (148) (329) (805) PBT 23,366 19,370 20.6 22,684 106,663 91,682 16.3 Tax (7,344) (6,043) (6,540) (33,129) (28,458) PAT 16,021 13,327 20.2 16,144 73,534 62,581 17.5 RM cost 38.7 40.1 40.9 36.3 36.8 Employee cost 6.2 6.7 4.8 7.6 7.4 Other expenses 20.4 20.7 22.7 22.3 22.0 EBITDA margins 34.7 32.5 31.6 33.8 33.8 EBIT Margins 35.3 33.9 33.3 35.5 35.3 PBT margins 35.1 33.6 33.1 35.4 35.0 Tax rate 31.4 31.2 28.8 31.1 31.0 PAT margins 24.1 23.1 23.5 24.4 23.9 July 26, 2012 2
Exhibit 2: Segmental Break up (Rs m) Y/e March Q1FY13 Q1FY12 YoY gr. (%) Q4FY12 QoQ gr. (%) Revenue Cigarettes 33,042 28,736 15.0 32,499 1.7 Other FMCG 14,731 11,978 23.0 16,165 (8.9) Total FMCG 47,773 40,713 17.3 48,664 (1.8) Hotels 2,324 2,305 0.8 2,858 (18.7) Agri business 16,914 17,071 (0.9) 14,142 19.6 Paper and packaging 10,361 9,596 8.0 9,799 5.7 Total- other businesses 29,599 28,972 2.2 26,800 10.4 Total segment revenue 77,372 69,685 11.0 75,464 2.5 EBIT Cigarettes 18,998 15,767 20.5 17,579 8.1 Other FMCG (388) (763) NA (167) NA Total FMCG 18,610 15,004 24.0 17,412 6.9 Hotels 262 513 (48.9) 829 (68.4) Agri business 1,714 1,571 9.1 1,056 62.3 Paper and packaging 2,647 2,270 16.6 1,958 35.2 Total- other businesses 4,623 4,354 6.2 3,842 20.3 Total EBIT 23,233 19,358 20.0 21,254 9.3 EBIT margins Cigarettes 57.5 54.9 54.1 Other FMCG (2.6) (6.4) (1.0) Total FMCG 39.0 36.9 35.8 Hotels 11.3 22.3 29.0 Agri business 10.1 9.2 7.5 Paper and packaging 25.5 23.7 20.0 Total- other businesses 15.6 15.0 14.3 Total 30.0 27.8 28.2 Exhibit 1: Cig Volumes up ~1%; ahead of expectations 10 8 6 4 2 0-2 -4-6 1QFY08 3QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 July 26, 2012 3
Exhibit 2: Other FMCG losses decline 49% YoY 0-200 -400-600 -800-1,000-1,200-1,400-1,226-1,166-1,270-1,173-850 -860-787 -893-998 -669-736 -678-763 -559-466 -167-388 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Exhibit 3: Margins expand in every segment; except Hotels Cigarette margins up 260bps 80.0% 60.0% 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 40.0% 20.0% 0.0% -20.0% Cigarettes Other FMCG Hotels Agri business Paper and packaging Exhibit 4: SOTP Multiple (EV/ EBITDA) EBITDA (FY14E) Contribution to value of ITC (Rs m) (Rs/ share) Cigarettes 17 91,530 1,610,924 206 FMCG-Others (EV/Sales) 2 77,392 185,741 24 Hotels 15 4,444 66,655 9 Agri business 8 7,548 60,384 8 Paper 8 16,080 128,637 16 Net (debt)/ cash 95,631 12 Total value per share 2,147,973 275 Source: PL Research July 26, 2012 4
Income Statement (Rs m) Net Revenue 222,737 261,837 301,614 350,084 Raw Material Expenses 81,184 96,455 109,615 127,323 Gross Profit 141,553 165,382 191,999 222,761 Employee Cost 17,240 19,441 22,923 25,906 Other Expenses 50,236 57,526 67,260 75,618 EBITDA 74,077 88,415 101,816 121,237 Depr. & Amortization 6,991 7,455 8,110 8,900 Net Interest 502 804 329 299 Other Income 7,765 11,556 13,286 15,361 Profit before Tax 74,349 91,712 106,663 127,399 Total Tax 23,655 28,486 33,129 39,574 Profit after Tax 50,694 63,227 73,534 87,825 Ex-Od items / Min. Int. 611 643 643 643 Adj. PAT 50,083 62,584 72,891 87,182 Avg. Shares O/S (m) 7,738.1 7,818.4 7,818.4 7,818.4 EPS (Rs.) 6.5 8.0 9.3 11.2 Cash Flow Abstract (Rs m) C/F from Operations 44,897 54,119 66,992 80,200 C/F from Investing (7,958) (4,860) (5,595) (5,922) C/F from Financing (29,903) (42,640) (50,934) (60,911) Inc. / Dec. in Cash 7,036 6,619 10,463 13,367 Opening Cash 58,941 66,128 72,747 83,210 Closing Cash 66,128 72,747 83,210 96,577 FCFF 43,169 49,546 61,649 74,468 FCFE 43,308 49,446 61,549 74,368 Key Financial Metrics Growth Revenue (%) 16.4 17.6 15.2 16.1 EBITDA (%) 17.1 19.4 15.2 19.1 PAT (%) 20.3 25.0 16.5 19.6 EPS (%) 20.3 23.7 16.5 19.6 Profitability EBITDA Margin (%) 33.3 33.8 33.8 34.6 PAT Margin (%) 22.5 23.9 24.2 24.9 RoCE (%) 32.5 36.0 37.2 39.6 RoE (%) 32.4 35.8 37.2 39.6 Balance Sheet Net Debt : Equity (0.4) (0.4) (0.4) (0.4) Net Wrkng Cap. (days) 72 70 54 41 Valuation PER (x) 38.5 31.2 26.8 22.4 P / B (x) 11.7 10.6 9.4 8.4 EV / EBITDA (x) 25.2 21.2 18.3 15.3 EV / Sales (x) 8.4 7.2 6.2 5.3 Earnings Quality Eff. Tax Rate 31.8 31.1 31.1 31.1 Other Inc / PBT 10.4 12.6 12.5 12.1 Eff. Depr. Rate (%) 5.0 4.8 4.7 4.6 FCFE / PAT 86.5 79.0 84.4 85.3. Balance Sheet Abstract (Rs m) Shareholder's Funds 164,621 184,664 206,721 233,106 Total Debt 1,246 1,146 1,046 946 Other Liabilities 9,520 9,733 9,981 10,277 Total Liabilities 175,386 195,543 217,748 244,329 Net Fixed Assets 105,118 113,578 123,849 135,731 Goodwill Investments 6,819 7,319 7,819 8,319 Net Current Assets 63,317 74,514 85,948 100,146 Cash & Equivalents 66,128 72,747 83,210 96,577 Other Current Assets 85,357 101,543 117,690 135,227 Current Liabilities 88,168 99,777 114,952 131,658 Other Assets 132 132 132 132 Total Assets 175,386 195,543 217,748 244,329 Quarterly Financials (Rs m) Y/e March Q2FY12 Q3FY12 Q4FY12 Q1FY13 Net Revenue 59,742 61,954 68,614 66,522 EBITDA 21,080 23,000 21,701 23,075 % of revenue 35.3 37.1 31.6 34.7 Depr. & Amortization 1,701 1,739 1,880 1,948 Net Interest 142 223 148 138 Other Income 2,918 3,729 3,012 2,376 Profit before Tax 22,155 24,767 22,684 23,366 Total Tax 7,012 7,757 6,540 7,344 Profit after Tax 15,143 17,010 16,144 16,021 Adj. PAT 15,143 17,010 16,144 16,021 Key Operating Metrics Cig Vol. Gr. (2.8) 6.0 (2.0) 6.0 Cig Pricing Gr. 18.0 6.1 15.0 8.0 Cig EBIT Gr. 17.5 19.8 17.0 16.8 Other FMCG Rev. Gr. 23.0 23.4 18.1 18.1 Other FMCG Losses (3,315) (2,141) (1,169) 1,072. July 26, 2012 5
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 56.0% 22.7% 20.0% 1.3% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. July 26, 2012 6